Singapore beset by economic malaise

By Alan Wheatley / REUTERS , SINGAPORE

If you're a civil servant, Malaysia was the place to be this week rather than Singapore.

A day after Malaysia gave its bureaucrats a bonus of half a month's wages as part of a package to boost its economy, next-door Singapore on Thursday cut the pay of ministers and top civil servants by 10 percent and froze the rest.

Both economies are struggling to cushion the demand shock delivered by the deadly SARS virus.

But while Malaysia took its cue from Hong Kong and Taiwan and included a healthy dose of fiscal stimulus in its package, Singapore's cautious response reflected a growing conviction that demand management has only a limited role to play in a small open economy buffeted by fast-changing business cycles.

"They only use fiscal policy as a counter-cyclical when they see the whites of the eyes of recession. The approach is always to use wage restraint as the first line of defense," said PK Basu of Robust Economic Analysis Ltd, a Singapore consultancy.

The clampdown on civil-service pay followed a recommendation by the city state's National Wages Council of wage cuts for firms hit by SARS and a pay freeze for most other companies grappling with the uncertain economic environment.

"Unit labor costs are still falling, so to call for additional wage restraint in a deflationary environment is tough medicine -- inappropriately tough medicine," Basu said.

With SARS decimating Singapore's tourism industry, Tony Nafte of CLSA Emerging Markets in Singapore said it made good sense to keep corporate costs to a minimum pending an upturn.

But he said the economy needed a boost to consumption to compensate for the wage freeze.

"Because they're not doing that, I would give this a thumb's down overall," Nafte said.

Nafte said he favored bringing forward scheduled cuts in Singapore's corporate and personal taxes as well as temporarily scrapping the island's 4 percent sales tax. Malaysia put more money in people's pockets by cutting employee contributions to the state welfare fund.

The wage freeze was the second leg of Singapore's response to SARS. Last month the city state unveiled measures worth just 0.1 percent of GDP -- even though it runs a budget deficit of under 1 percent of GDP and has large reserves.

Malaysia's package, which had been in the pipeline before the SARS outbreak, totalled 2 percent of GDP. Hong Kong's was worth 1 percent of GDP and Taiwan's came to 0.5 percent of GDP.

"I'm just not that encouraged by the government's fiscal stance. They're being just too overly conservative," Nafte said. "If there's any country in the region that has the money to spend, it's Singapore. So I don't see that as a problem."

The problem, as Singapore sees it, is that pump-priming doesn't provide much bang for the buck. Two packages to help the economy recover from a recession in 2001, the steepest downturn since the country's independence in 1965, cost 7 percent of GDP but boosted last year's output by only 1 percentage point.

This was largely because Singapore is a very open economy so any direct government expenditure leaks away into imports.

Indirect measures to shore up profits and balance sheets -- such as this week's wage freeze -- provide a bigger boost to GDP in the medium term than active counter-cyclical policies, according to the Monetary Authority of Singapore.